Question 1

Financial leases are a source of financing in the sense that:

Accepted Answer

A) the lessor must find a source of financing to buy the asset. 
B) the lessee must borrow money for his first lease payment. 
C) the lessee avoids buying, but gets the use of the asset through financing. 
D) the lessor can use the lease payments as collateral to borrow. 
A) the lessor must find a source of financing to buy the asset. 
B) the lessee must borrow money for his first lease payment. 
C) the lessee avoids buying, but gets the use of the asset through financing. 
D) the lessor can use the lease payments as collateral to borrow.

Question 2

Which one of the following is a valid statement about leasing in Canada?

Accepted Answer

A) less than 5% of machinery and equipment in Canada is leased. 
B) lessors prefer to keep equipment at the end of a lease in order to lease it again. 
C) lessees typically purchase the asset at the end of the lease. 
D) operating leases are particularly useful in the long term. 
A) less than 5% of machinery and equipment in Canada is leased. 
B) lessors prefer to keep equipment at the end of a lease in order to lease it again. 
C) lessees typically purchase the asset at the end of the lease. 
D) operating leases are particularly useful in the long term.

Question 3

In a net lease:

Accepted Answer

A) the lessee pays for insurance, but does not maintain the asset. 
B) the lessee pays to maintain, insure, and meet property tax obligations on the asset. 
C) the lessor pays for insurance, maintenance, and property taxes. 
D) the lessor and lessee split the maintenance, insurance, and property taxes 50:50. 
A) the lessee pays for insurance, but does not maintain the asset. 
B) the lessee pays to maintain, insure, and meet property tax obligations on the asset. 
C) the lessor pays for insurance, maintenance, and property taxes. 
D) the lessor and lessee split the maintenance, insurance, and property taxes 50:50.

Question 4

The best situation to encourage leasing would be one in which:

Accepted Answer

A) the lease payments are larger in the early part of a short contract. 
B) the interest rate is low. 
C) the lessee's tax rate is lower than the lessor's. 
D) The CCA tax shield occurs late in the lease period. 
A) the lease payments are larger in the early part of a short contract. 
B) the interest rate is low. 
C) the lessee's tax rate is lower than the lessor's. 
D) The CCA tax shield occurs late in the lease period.

Question 5

If a leased asset were scrapped from a continuing CCA pool after four years, and its UCC were $10,000 and its salvage is zero, what would the present value of this asset's tax shelter be if the appropriate after-tax borrowing rate is 9%, the CCA rate is 20%, and the tax rate is 40%?

Accepted Answer

A) - $2,759 
B) - $1,955 
C) + $10,000 
D) + $2,759 
A) - $2,759 
B) - $1,955 
C) + $10,000 
D) + $2,759

Question 6

Short-term leases are convenient but:

Accepted Answer

A) often expensive for the lessee. 
B) often cheap for the lessee. 
C) usually involve second-rate equipment. 
D) are not as profitable for the lessor as longer-term ones. 
A) often expensive for the lessee. 
B) often cheap for the lessee. 
C) usually involve second-rate equipment. 
D) are not as profitable for the lessor as longer-term ones.

Question 7

Chan is a financial services firm.They need computer equipment and have decided to lease the equipment with an operating lease.They want to prevent additional debt from showing up on their balance sheet.Which of the following must be true about their lease for this to work?

Accepted Answer

A) the lease term is equal to 65% or more of the economic life of the leased property. 
B) the present value of the minimum lease payments is equal to 75% or more of the fair value of the leased property at the inception of the lease. 
C) the present value of the minimum lease payments is equal to 90% or more of the fair value of the leased property at the inception of the lease. 
D) the lease term is equal to 90% or more of the economic life of the leased property. 
A) the lease term is equal to 65% or more of the economic life of the leased property. 
B) the present value of the minimum lease payments is equal to 75% or more of the fair value of the leased property at the inception of the lease. 
C) the present value of the minimum lease payments is equal to 90% or more of the fair value of the leased property at the inception of the lease. 
D) the lease term is equal to 90% or more of the economic life of the leased property.

Question 8

Globetech is considering leasing a $75,000 equipment.Five annual payments of $15,000 are due in advance.Globetech's required rate of return is 9% and has a 35% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fifth year, the asset becomes worthless.Determine the NPV of the lease.
 $$\begin{array}{l}
\begin{array} { | c | c | c | c | c | c | c | } 
\hline\text { CCA Tax Syielda }\
\hline & \mathbf { 0 } & \mathbf { 1 } & \mathbf { 2 } & \mathbf { 3 } & \mathbf { 4 } & \mathbf { 5 } \
\hline \text { UCC } & 75,000 & 65,625 & 49,219 & \mathbf { 3 6 , 9 1 4 } & \mathbf { 2 7 , 6 8 6 } & \mathbf { 2 0 , 7 6 4 } \
\hline \text { CCA } & 9,375 & 16,406 & 12,305 & 9,229 & 6,921 & \
\hline \text { CCA tax shield } & \mathbf { 3 , 2 8 1 } & 5,742 & 4,307 & \mathbf { 3 , 2 3 0 } & 2,422 & 7,267 \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Globetech is considering leasing a $75,000 equipment.Five...

Question 9

You are the manager of a sales division.You are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for eight years at $60,000 per year.The company faces a tax rate of 40% and a CCA rate of 10% on vehicles.If the company buys the cars and finances the purchase with a loan, they will pay 7% after-tax in interest.Assume that after the term of the lease is over, the salvage value of the cars will be zero.What is the NPV of the lease?

Accepted Answer

A) $9,340 
B) $16,754 
C) $29,521 
D) 34,195 
A) $9,340 
B) $16,754 
C) $29,521 
D) 34,195

Question 10

Which of the following is not required to calculate the NPV of a lease?

Accepted Answer

A) present value of the net benefit that comes from the residual value lost because of leasing. 
B) original purchase price of the asset. 
C) present value of CCA lost. 
D) present value of before-tax lease payments. 
A) present value of the net benefit that comes from the residual value lost because of leasing. 
B) original purchase price of the asset. 
C) present value of CCA lost. 
D) present value of before-tax lease payments.

Question 11

If a financial analysis of a lease shows a negative result of $500, a manufacturer could alter the lease terms to make leasing profitable by:

Accepted Answer

A) cutting his price to the lessor by more than $500. 
B) raising the CCA rate for the lessor. 
C) raising salvage value by lowering the discount rate. 
D) raising the lease terms. 
A) cutting his price to the lessor by more than $500. 
B) raising the CCA rate for the lessor. 
C) raising salvage value by lowering the discount rate. 
D) raising the lease terms.

Question 12

It is difficult to rent fragile equipment in short-term operating leases.

Accepted Answer

A) True 
 B)False

Question 13

When deciding whether or not to lease an asset, the _____________ should be compared against the ______________, and if the first is lower then the company should proceed with the lease.

Accepted Answer

A) internal rate of return; cost of debt 
B) WACC; cost of debt 
C) cost of debt; internal rate of return 
D) return on equity; WACC 
A) internal rate of return; cost of debt 
B) WACC; cost of debt 
C) cost of debt; internal rate of return 
D) return on equity; WACC

Question 14

Which of the following is not a reason for leasing?

Accepted Answer

A) leasing provides the lessor with insurance against obsolescence. 
B) leasing can reduce taxable income. 
C) leasing can be a source of off-balance-sheet financing, provided certain conditions are met. 
D) a company can obtain financing easier by the leasing company retaining title to the asset. 
A) leasing provides the lessor with insurance against obsolescence. 
B) leasing can reduce taxable income. 
C) leasing can be a source of off-balance-sheet financing, provided certain conditions are met. 
D) a company can obtain financing easier by the leasing company retaining title to the asset.

Question 15

A lessor and lessee have the same exposure to financial risk.

Accepted Answer

A) True 
 B)False

Question 16

The lessee in a financial lease bears the most of the same risks and rewards as ownership except:

Accepted Answer

A) he doesn't know how large his lease payments are. 
B) he has no tax shelter for his cash outflows. 
C) he has no access to capital gain from an extraordinary salvage value. 
D) he can cancel his obligations to a lessor with 30 days' notice. 
A) he doesn't know how large his lease payments are. 
B) he has no tax shelter for his cash outflows. 
C) he has no access to capital gain from an extraordinary salvage value. 
D) he can cancel his obligations to a lessor with 30 days' notice.

Question 17

A capitalized lease affects financial leverage and rate of return calculations.

Accepted Answer

A) True 
 B)False

Question 18

The appropriate discount rate for financial lease analysis is:

Accepted Answer

A) the after-tax cost of equity. 
B) the lessee's weighted average cost of capital. 
C) the lessor's required rate of return. 
D) the lessee's after-tax cost of secured debt. 
A) the after-tax cost of equity. 
B) the lessee's weighted average cost of capital. 
C) the lessor's required rate of return. 
D) the lessee's after-tax cost of secured debt.

Question 19

The salvage value of a leased asset affects the cost of the lease through the tax shields associated with owning.

Accepted Answer

A) True 
 B)False

Question 20

If a lessor has a tax bracket much higher than a lessee's, and the CCA tax shields occur early in the lease, there is little incentive for a lessor and lessee to construct a lease to their mutual after-tax benefit.

Accepted Answer

A) True 
 B)False

Exam 17: Leasing

Financial leases are a source of financing in the sense that:

Which one of the following is a valid statement about leasing in Canada?

In a net lease:

The best situation to encourage leasing would be one in which:

If a leased asset were scrapped from a continuing CCA pool after four years, and its UCC were $10,000 and its salvage is zero, what would the present value of this asset's tax shelter be if the appropriate after-tax borrowing rate is 9%, the CCA rate is 20%, and the tax rate is 40%?

Short-term leases are convenient but:

Chan is a financial services firm.They need computer equipment and have decided to lease the equipment with an operating lease.They want to prevent additional debt from showing up on their balance sheet.Which of the following must be true about their lease for this to work?

Which of the following is not required to calculate the NPV of a lease?

If a financial analysis of a lease shows a negative result of $500, a manufacturer could alter the lease terms to make leasing profitable by:

It is difficult to rent fragile equipment in short-term operating leases.

When deciding whether or not to lease an asset, the _____________ should be compared against the ______________, and if the first is lower then the company should proceed with the lease.

Which of the following is not a reason for leasing?

A lessor and lessee have the same exposure to financial risk.

The lessee in a financial lease bears the most of the same risks and rewards as ownership except:

A capitalized lease affects financial leverage and rate of return calculations.

The appropriate discount rate for financial lease analysis is:

The salvage value of a leased asset affects the cost of the lease through the tax shields associated with owning.

If a lessor has a tax bracket much higher than a lessee's, and the CCA tax shields occur early in the lease, there is little incentive for a lessor and lessee to construct a lease to their mutual after-tax benefit.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

When deciding whether or not to lease an asset, the _ should be compared against the __, and if the first is lower then the company should proceed with the lease.